Essay on Why Companies Are Holding, Record, Level Of Cash

1131 Words Apr 15th, 2015 null Page
There are many reasons as to WHY companies are holding “record” level of cash. One reason could be because profits have been pouring in like never before. Study conducted by the Department of Commerce, shows us the following. In 2013, U.S companies consistently hit nine percentage points. To put in perspective, that number is 60 percent higher than the average sixty years ago(Smith)! Nearly a 50 percent increase in profits. As a result, this huge increase in profit has yielded a great amount of cash. Another reason corporations hoard so much cash is that it offers flexibility. Corporate managers and top leaders worry that they will not be able to acquire credit. So, by having an excess amount of cash, it can alleviate the pressure to take out a loan. At the same time, credit markets will suffer and it’ll decrease the opportunity to borrow for other various firms. Hoarding cash can ultimately decrease any economic activity. Why would a company hold excess cash on their balance sheets? They do this to simply maintain a cash balance in order to provide liquidity necessary for transaction purposes such as paying bills. Maintaining a low cash balance will eventually dry out the firms cash flow. In response, companies would have to raise short term cash by selling marketable securities or taking on debt. Lastly, taxes play a vital role in why corporations hoard their cash. Simply put, corporations would rather store their money abroad instead of paying a hefty repatriation tax.…

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